Tech Market WatchBy Perry Wu
This past week Sohu (SOHU) announced that it had bought back 360,000 of its own shares at a price of about US$17, spending more than US$6 million during November alone. But deciding whether this was a good decision all depends on your view of Sohu.

On the face of it, stock buybacks have the potential to be one of the most shareholder-friendly actions Sohu could possibly take. Sohu is saying that rather than use its excess cash in a risky endeavor, such as buying an unrelated company, it is deciding to allocate its cash in an investment it knows best: itself.

It is also one of the most humble actions Sohu's management could take. Sohu's management would surely have gotten more media attention if it had taken the US$6 million and done an acquisition, or used the money to introduce a new product, or expand in a brand new market. But simply re-purchasing stock barely gets a mention by journalists. So Sohu is doing a potentially good thing that will hardly bring fame to Charles Zhang and his management team.

On the other hand, Sohu's move may have some repercussions. Sohu's stock price is currently way off its 52-week high of US$40. Sohu's actions as a big buyer purchasing Sohu shares creates upward pressure on Sohu's stock. And buying back shares will mathematically mean that Sohu will have a higher earnings per share in the future, simply because there are fewer shares.

Nevertheless, at an average volume of around 2 million shares traded daily, that equates to tens of millions of shares traded in November. So Sohu's purchases of only 360,000 shares in November almost certainly made little difference in the stock price over the last month. And taking away 360,000 shares away from a company that already has over 36 million shares outstanding will have little incremental effect on earnings per share.

So the key question investors need to ask is something different. The question investors should be asking is the classic question about any business deal: Did Sohu get a good deal? In other words, was buying Sohu shares at an average price of US$17 a good value? Of course, that all depends on whether you think the company is over-valued or under-valued at that price.

The fact that Sohu's share price is certainly cheaper than when it was trading at US$40 several months ago does not mean that is cheap. A bad deal at $40 could still be a bad deal at $17 if the company is not worth it even at that price.

So how much is Sohu worth? Well, let's look at the big picture. Sohu's annualized earnings are only about US$30-US$40 million. Those numbers are peanuts for a listed Internet company that has been operating for eight years. Sohu should get into English-language media overseas so it can charge more money for CPM to advertisers (maybe do a Lenovo-IBM deal and buy Yahoo??). Some may argue that Sohu's potentially explosive growth as a Chinese tech company should be reflected in a higher multiple. I strongly disagree. The risks in Sohu's businesses are high and this has been unmistakably proven by China Mobile's actions to cut off SMS revenue at the drop of a hat. Sohu also has entrenched competitors who have identical business models, users, and marketing campaigns. The company does have a solid management team, but with masters like Koo and Palaschuk gone from the company, Zhang now needs to place his trust in others' hands.

At a share price of US$17, the company is still richly valued at more than US$600 million. Sohu should keep its checkbook closed until its share price becomes a genuinely good deal.

About the author:
Perry Wu is a writer and correspondent for and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.


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